Value Capture Finance – A Promising Tool for Infrastructure?

By |2018-07-31T13:28:42+00:00September 12th, 2014|

In the search for innovative financing mechanisms in the infrastructure industry, value capture financing has emerged as a beneficial tool. Long established as a local government mechanism for real estate and redevelopment financing, value capture is now being used to directly support significant infrastructure programs around the country. The idea is simple. Wherever new transportation access is provided (such as new interchanges, new transit stations, or new transportation corridors) nearby property becomes more attractive for development and improvement. Resulting land value premiums from this investment create an enhanced tax revenue base.

What is it, and why use it?
The diagram to the right illustrates the concept. When new access or improved capacity for travel is created, the private real estate market responds and opportunities for new real estate investment are generated. The resulting increases in real estate values are “captured” to support the costs of the project. Typical value capture tools include: tax increment finance, development impact fees, special assessments, or joint development approaches. Because reliance on real estate taxes can offer multi-year funding support, the approach is particularly useful for annualized project debt reduction toward bond issuances and other finance tools.

In the past, property taxes and other fees collected in this manner have mostly benefited local government for community infrastructure and development incentives to improve local tax conditions. Until recently, little benefit has been returned to the owners of major infrastructure who created the opportunities in the first place.

How is it Being Used?
Departments of transportation and transit agencies are looking more carefully at using this tool to serve as gap financing. As the industry continues its struggle to find new revenue sources, federal, state, and local entities are increasingly turning to value capture financing. Rarely will the benefits of the value capture finance approach be used as a sole source to finance big infrastructure. But, it can still be a major contributor. For example, the Minnesota Department of Transportation’s Alternative Transportation Finance Program has been examining multiple ways to incorporate value capture finance into its work program.

Recently, RS&H completed a value capture finance study for Grundy County, Illinois, which determined that the communities of Morris and Minooka could mutually use value capture financing to generate sufficient revenue for a new three-mile ($6-10 million) industrial street corridor. On a larger scale, the City of Fort Worth, Texas, has harnessed the increased tax base from an urban village established around the Southwest Parkway, a future toll road. The toll road was redesigned to be context sensitive so that it would support value capture in the surrounding development and so that tax revenues from the tax increment financing (TIF) District would repay a portion of the bonds issued by the city. This covered $60 million of the city’s $120 million portion of the cost of the toll road.

In the transit industry, services delivered on fixed guideways tend to substantially increase the value of adjacent land. Land value premiums near commuter rail transit stations often exceed thirty percent. Though not exclusively transit-oriented, the most successful use of value capture is the Atlanta Beltline, in which a special value capture district was created though state legislation. One of the more recent significant proposals for transit value capture is the Cotton Belt in Dallas, Texas. The 62-mile planned corridor includes 27 stations and would connect four light rail and two commuter lines. Of the total $2.7 billion capital plan, value capture would account for $907 million.

What Does the Future Hold?
The role of value capture financing in the transportation industry is evolving. Realizing widespread use of value capture techniques for projects of significant scale will require solving the issue of interagency real estate assessment and taxation policy. Multiple taxing jurisdictions, which are different for each project, will have to be overcome for project sponsors to seriously consider value capture as a viable financing mechanism. As with P3 legislation, industry experts anticipate that state legislatures will undertake initiatives to create special value capture districts like the one that supports the Atlanta Beltline. Regional agencies, such as the Puget Sound Regional Council have taken interest in this issue and are beginning work on model legislation.

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